This paper uses a direct-projections approach to estimate the effect of capital gains taxation on realizations at state level and then develops framework for determining revenue-maximizing rates federal level. We find that elasticity revenues with respect tax rate over 10-year period is −0.5 −0.3, indicating cuts do not pay themselves 5 percentage point increase would yield $18 $30 billion in a...

We examine the optimal trading strategy for an investment fund which in the absence of transactions costs would like to maintain assets in exogenously fixed proportions, e.g. 60/30/10 in stocks, bonds and cash. Transactions costs are assumed to be proportional, but may differ with buying and selling, and may include a (positive) capital gains tax component. We show that the optimal policy invol...

As the centerpiece of its “growth package,” the Bush Administration proposes to eliminate taxes that individuals pay on dividend payments they receive from corporations. These dividends would receive tax-free treatment to the extent that they have been paid from profits subject to the corporate income tax. For individuals who hold shares in companies that do not pay dividends, the proposal woul...

We compute the value of a firm that pays its cash flows each period through share repurchases in a dynamic environment where personal taxes are paid on realized capital gains and dividends. These results provide a measure of the personal tax advantages of equity financing relative to debt financing, which are often cited as increasing the cost of debt. The initial price of the firm depends on t...

As a purely practical matter, raising taxes for the richest Americans is harder than it might seem. Several options that have received considerable attention and some support either would not raise much revenue or are unadministrable (or close to it). Much of the problem comes down to the challenge of taxing capital. In particular, increasing the tax rate on capital gains income is problematic ...

We formulate a computationally tractable extension of the classical Merton optimal consumptioninvestment problem to include the capital gains taxes. This is the continuous-time version of the model introduced by Dammon, Spatt, and Zhang [Rev. Financ. Stud., 14 (2001), pp. 583–616]. In this model the tax basis is computed as the average cost of the stocks in the investor’s portfolio. This averag...